The Distress Began in Detroit, and Here's Where It's Headed
By George Leong
The distressed situation—or economic Armageddon—with Detroit (or “Motor City, USA” as it was widely known) was in part created by poor urban planning coupled with a dependence on the automobile sector and little else. I recently wrote about the bankruptcy in the city and how it might foreshadow what’s to come in other municipalities that are also struggling under enormous debt.
I just watched an amazing documentary called Detropia (2012) that tried to explain why Detroit failed. The film (available on Netflix) offers reasons for the abandonment and collapse of this city—a city that at one point had over 2.5 million people but has since dwindled down to the 800,000 range. Of course, along with the migration go tax dollars, the city’s revenue base, manufacturing jobs, and many skilled and educated workers.
In my view, Detroit is a perfect example of urban decay in America. The city is not alone in its decline, but poor money management and a lack of a vision allowed this city to fall to shambles. There are about 100,000 vacant homes and buildings in the city, according to the documentary. And each day, many are destroyed, with the valuable metal scraps, such as copper, left for hoarders. The city doesn’t care because they can’t afford to extract the metal.
After watching the movie, you get a sense of what did and did not happen in Detroit. And, in fact, it was not only the collapse of the auto sector that killed the city; the reality is that many manufacturers have left cities such as Detroit for cheaper manufacturing jobs in Mexico and China. More and more U.S. companies building products for the U.S. and global markets are finding it difficult to compete if they have to pay the higher relative wages for manufacturing jobs here.
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The documentary highlighted the case of American Axle & Manufacturing Holdings, Inc. (NYSE: AXL), which demanded its workers in Detroit accept significant wage cuts or the manufacturing jobs would be moved to Mexico. Ultimately, the plant closed and the manufacturing jobs were moved to Mexico. The case with American Axle is not isolated to that company, as similar situations are happening with many companies that are being forced to lower costs, improve the bottom line, and please shareholders, which is why many manufacturing jobs are leaving our borders.
The reality is that many of these manufacturing jobs are gone for good. With average wages of manufacturing jobs being around $2.00–$3.00 an hour in Mexico and just above $1.00 in China, companies aren’t going to come back.
The Obama administration can force added taxes on U.S. goods produced outside of its borders and then sold back in America—but all this does is drive up the cost of the final products sold here. Ultimately, that strategy is unlikely to work.
So, as Detroit tries to look for investors and restructure its economy, there will likely be other cities to follow Detroit’s decision of filing for bankruptcy as a possible alternative to their own hardships.
This article The Distress Began in Detroit, and Here’s Where It’s Headed was originally published at Investment Contrarians
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.